Surface Ripples

SETTING UP A FINANCIAL SERVICES REGULATOR

Regulation is the "hot topic" now thanks to the global financial crisis which broke in 2007.

Most countries have always had a regulator in some form or another. Often, this role has been performed by the Central Bank. However, as the global financial system develops and expands, many countries have started to examine whether they need to strengthen their regulatory capacity and what the most effective way of doing this is. For those setting up a regulator, the following need to be considered:

Objectives:
What will be the overall objectives of the regulator? Each country will have its own needs, which may or may not be common to those of its neighbours. The UK Financial Services Authority, which regulates the UK financial, markets has five:

• market confidence
• financial stability
• public awareness
• consumer protection
• reduction of financial crime

These cover a wide range of activities and thus the regulator will need to have diverse experts, skill sets and systems. What is essential is to work out what the country itself needs rather than trying to fit on someone else’s model. Since thew crisis, the UK FSA is being re-structured, so the conclusion is that this area will continue to be a "moveable feast" as time marches on.


Formation of the Regulator:
The regulator needs to be authorised and set up by law. Depending on the country, this will be by ministerial decree, parliamentary legislation, or other methods. The point is it has to exist in law and be a legally recognised institution to carry out its work. The law has to be drafted to allow it to do the job set out above.


Scope:
By this, we mean what sort of organisations the regulator will be expected to regulate and the powers it will have. Whilst this is easy to answer at one point in time, there’s no telling what the future might bring, as I hinted above. New financial products, services or technology will bring about the creation of new types of provider which may not exist now. Will the law allow them to fall under the scope of the regulator? If not, will they be exempt from its control? Hedge Funds are a prime example. Despite the fact that they’ve existed for some time nobody really thought to regulate them, resulting in perceived excesses and overstated contributions to the financial crisis.


Powers:
When promulgating the law setting up the regulator, its powers must be made clear (and these need to be enshrined in the law that sets up the regulator in the first place). Is it expected to set policy? Is it expected to supervise, inspect and report? Is it expected to approve appointments and if so at what level? Is it expected to take legal action in cases of fraud and/or criminal activity and impose penalties(and if so, under what legislation)? Existing laws may need to be reviewed for relevance and amended if required. What enforcement powers will it have? These need to be clearly stated. In the UK, various laws (e.g. the Financial Services and Markets Act 2000 and the Proceeds of Crime Act 2002) set out the law by which providers of financial services are expected to abide and under which they may be prosecuted for various offences.


Cooperation:
One of the lessons learnt in the UK as the crisis unfolded was that the UK regulator (the FSA), the Treasury and the Bank of England were not really coordinated and as a result no one took the lead in resolving the crisis for some time. It needs to absolutely clear who should do what and in what circumstances. These parties all need to work together and avoid overlap (which will make drafting the law even more critical as you can’t have two departments doing the same thing).

The regulator will also need to work with other world regulators and agencies, professional bodies and governments in order to maintain full awareness of worldwide developments in the financial services markets and their impact on the local scene.


Structure:
Will the regulator be independent of the Central Bank? Who will it report to? Who appoints its officers? How will it be structured? This will depend partly on the powers given at law (it will need departments to carry out those functions, e.g. audit, investigations). Are the staff available, and if not, how can they be found?


Systems and Processes:
Having a regulator is well and good, but assuming that monitoring is one of its functions, it needs systems and processes not only to gather information, but to analyse it and report problems quickly.


Budget:
The regulator has to be paid for to do its job. Most regulators levy fees on those whom they regulate and can also impose fines for breaches of regulations and code of conduct. The budget will largely depend on what the regulator is expected to do and the sophistication of the market which it oversees. This is why I’ve left this item til last!

In all, a number of issues to consider and manage on a continuing basis. This will be an industry that will always be playing "catch-up".

Labels: Regulation

posted by William Martin @ 01:22